Price control is an economic policy tool for controlling prices on the market, which adds an additional component to supply and demand. The idea behind it is to support certain groups of people and/or companies from the farming community as producers to socially deprived people and households. One of these measures is to set a minimum price for the trade of goods.

calculate map pricing

Definition Minimum advertised price (MAP)

In the economy, minimum prices are an instrument of state market regulation in which a certain price may not be undercut but may be overcut. Minimum prices are regarded as the lower (administered) price limit set by the state. The opposite is true of the maximum prices.

Definition MAP

The minimum price is a legally regulated price at which a good can at least be sold. The price may also be higher, but it may not be lower than the legal minimum price.
The minimum price is intended to prevent products from being sold at too low a price. While the maximum price is intended to support customers so that, for example, basic foodstuffs remain affordable for financially weaker households, the minimum price provides support for producers. This is particularly the case with dairy products and agriculture, so that farmers can maintain sufficient income for their work and therefore their products on the hard, international market.

However, as with the maximum price, the minimum price may also go nowhere. As an example, we turn again to the chocolate bar and assume that the equilibrium price is 2.50 euros. This means that suppliers and demand are in agreement at this price and the equilibrium quantity that can be determined as a result. Suppliers would like to sell at a higher price, but then demand decreases, and demanders would like to buy at a lower price, but then supply is missing.

If you now set a minimum price of two euros in this market situation, then you have created an ineffective legal minimum price, because customers are more willing to pay for the chocolate anyway. So the action was actually pointless. The situation is different if you set the minimum price at 2.80 euros. Because then the customers begin to rethink the purchase, while the offerers would like to sell more. It comes thus to the situation that at the market an offer surplus exists. Not every offer also finds a buyer.

Calculate the MAP

Knowing the minimum price also helps with discount campaigns. Some self-employed people set discount prices according to their feelings and wonder why the discount campaign went well, but in the end the account is in the red.

Since the contribution margin is actually intended for products and not for services, I have to adapt it to the service myself in the end. I would also like to say that this article is not necessarily intended for pupils and students who are currently studying the contribution margin in business administration. But for self-employed people who ask themselves the price question.

The formula of the contribution margin per unit of measure (db) is quite simple:

Contribution Margin per Unit of Measure (db) = Sales Revenue per Unit – Variable Unit Costs

Calculation of MAP

Suppose you own a pizzeria and (to keep the example simple) sell only Pizza Margherita. The standard price on the menu is 3,95 $. Unless otherwise stated, all prices in the example are net prices. Also to keep it simple.

Your variable costs per pizza are as follows:

Dough: 0,35 $
Cheese: 0,25 $
sauce: 0,15 $
Packaging: 0,15 $
Spices: 0,05 $
Adding up your variable unit costs is therefore 0.95 $. Your contribution margin (per quantity unit) is: 3,95 $ – 0,95 $ = 3,00 $. This would be the amount you would theoretically earn on each pizza if there weren’t other costs like the fixed and personnel costs.